About this special report: Defense News and analytics firm VisualDoD teamed to create the charts and tables in this report. For more information on VisualDoD, go to www.visualdod.com/.
WASHINGTON — The Pentagon’s five-year projections for procurement spending on its 63 major weapons programs, submitted to Congress this month, has turned more positive than last year’s spending forecast, according to an analysis of the US Defense Department’s 63 top weapons programs compiled by analytical firm VisualDoD.
The 2014 outlook for these efforts showed an overall 0.6 percent decline across the Future Years Defense Program (FYDP). The 2015 FYDP projects a slight growth of 2.5 percent.
Despite the slightly more rosy forecast, there is one issue that could throw a wrench into Pentagon procurement plans. DoD’s overall five-year spending outlook is $115 billion above federal spending caps, meaning it would need to be heavily modified or cut if sequestration remains in 2016 and beyond.
Of DoD’s 63 major weapons programs, funding for space-related efforts is projected to increase the most, showing a 4 percent average annual growth rate through the next five years, according to the VisualDoD data.
Byron Callan, an analyst with Capital Alpha Partners, noted that there also could be additional space funding within DoD’s classified budget coffers.
DoD spending on its top unmanned aircraft programs is expected to decline from projections a year ago, but still grow at a 2.5 percent average annual rate.
Purchases of the General Atomics MQ-9 Reaper are projected to decline 12 percent, or almost $397 million, between 2015 and 2018 when compared to 2014 planned spending levels across that same period.
Despite the NATO troop drawdown in Afghanistan, unmanned aircraft are still expected to play a large role there in the future. One program that could boost spending across this sector is the Navy’s Unmanned Carrier-Launched Airborne Surveillance and Strike program.
But as DoD’s spending on these systems declines, suppliers are going to have to pursue foreign military sales and global commercial sales to “stay afloat,” according to an analysis by Frost & Sullivan, a US-based consulting firm.
High development costs associated with new unmanned aircraft are “compelling several manufacturers to merely modify existing aircraft and subsystems,” the report said.
“Large defense contractors like Boeing, Northrop Grumman and Lockheed Martin will likely acquire and/or partner with technologically advanced small businesses to enhance their capabilities in the face of reducing market potential,” Michael Blades, an aerospace and defense analyst with the firm, said in a statement. “These acquisitions will help firms widen their profit margins as well as compete in the nascent civil [unmanned aircraft] market.”
The outlook for DoD’s top ground vehicle programs is much more dismal, particularly in light of the Army killing the Ground Combat Vehicle effort.
The Army instead moved money originally eyed for that program into the General Dynamics M-1 Abrams tank and Stryker vehicle programs.
Overhaul and maintenance work might preserve parts of the ground vehicle sector, Callan noted, but not much money is going toward new programs. The only new vehicle efforts are the Joint Light Tactical Vehicle and Armored Multi-Purpose Vehicle.
Projected Pentagon spending on its top helicopter programs in the coming years is bleak, with rotary-wing procurement expected to fall 14 percent annually, according to the analysis.
Two helicopter programs — MH-60 Seahawk and UH-72 Lakota — are slated to reach the end of production in DoD’s five-year projections. (Other major programs in the same boat include Raytheon’s Joint Standoff Weapon and Tactical Tomahawk, General Atomics’ MQ-1C Gray Eagle, and Oshkosh’s Family of Heavy Tactical Vehicles.)
“It’s 50 percent off the peak, which is pretty draconian,” Richard Aboulafia, vice president of analysis at the Virginia-based Teal Group, said of the military helicopter market projections.
A big unknown in this sector is the procurement rate for the Air Force’s Combat Rescue Helicopter program.
The Air Force intends to award to Sikorsky a contract for 112 new Black Hawk helicopters that will replace HH-60G Pave Hawks by the end of June, according to service officials.
The Air Force says it plans to spend just over $1 billion between 2015 and 2019 for the effort.
But the Army plans to retire the Bell Kiowa Warrior and has not funded a new armed aerial scout program.
It did, however, fund procurement of 100 new Airbus Lakota helicopters, adding more than $800 million for that effort in the coming four years.
The downturn in military helicopter purchases could lead to a major merger within the industry, Aboulafia said.
The military has relied heavily on helicopters over the past decade, particularly in Afghanistan, where rugged terrain has limited the access of fixed-wing aircraft and ground vehicles.
Production rates have soared for the big US helicopter makers Sikorsky, Boeing and Bell over this period.
The projected downturn in the helicopter market sounds bad, “but on the other hand we were at a very high [production] peak,” Aboulafia said.
Fewer military buys could lead to the acquisition or merger of one of the three big US helicopter makers, the analyst said.
“You have to ask the question, is three primes the right number for the US, especially when there is foreign competition from another two primes?” Aboulafia said.
“You’re going to almost certainly see the impetus for a merger or for some kind of asset swap,” he said. “It’s just a question of whether [the Justice Department] and DoD permit it.”
The three prime helicopters survived defense spending declines in the 1990s and the current projected downturn is still not as severe as two decades ago.
“Even with this downturn, there’s more business than there was,” Aboulafia said. “On the negative side, corporations have different expectations of growth and profitability today.”
Airbus Helicopters, formerly Eurocopter, and Finmeccanica subsidiary AgustaWestland have each competed for US military business.
The only new DoD helicopter program looming way out in the 2020s is what is being called Joint Multi-Role program.
A major Pentagon review of the acquisition system last year showed DoD has a difficult time purchasing and developing new helicopters. Between 1997 and 2011, 10 of 13 of its helicopter programs experienced cost growth of at least 15 percent above original estimates.
The Wild Card
The one wild card in DoD’s procurement outlook is the White House’s Opportunity Growth and Security Initiative — a funding measure separate from the Pentagon’s 2015 base budget proposal.
“This is where the lobbyists are really going to earn their pay this year,” Callan said. “It seems to be stuffed with things that ... big companies could go to the mat for.”
The bill could boost procurement levels in 2015 by $8 billion. The initiative includes $1.2 billion in funding for 56 new helicopters alone and another $1.1 billion for new Boeing P-8 maritime surveillance aircraft.
The other unknown is the Pentagon’s war funding projections for 2015, known as overseas contingency operations (OCO). War spending measures have historically included limited procurement funding; however, DoD has used the request to replace equipment damaged or destroyed in combat.
“There’s all these budgetary tricks and sleights of hand,” Aboulafia said of the White House initiative and OCO budget. “So, it’s not the base budget that has anything of interest, it’s the way procurement is being handled as a series of wishes and hopes.”
DoD submitted a $79 billion “placeholder” for its war budget. However, that number is expected to decline as American forces leave Afghanistan.
The Afghan government has yet to approve a force-level agreement that would allow NATO troops to remain in the country beyond the end of this year.■